PayPal Faces $25 Million Penalty Over Alleged Illegal Credit Sign-Ups

The Consumer Financial Protection Bureau has proposed that PayPal refund $15 million to customers and pay a $10 million civil penalty to settle allegations that it engaged in a series of deceptive business practices with its PayPal Credit product, formerly known as Bill Me Later.

Federal regulators allege that PayPal signed up customers who didn’t want PayPal Credit accounts, failed to honor promotional offers, unfairly steered customers to use the product, and let fees pile up while mishandling billing disputes.

The CFPB made the allegations and proposed the settlement in a lawsuit filed in a Maryland federal court this week. Among the more serious claims: that PayPal often charged late fees and interest on balances with pending disputes, “even when the disputes concern defendants’ own practices, including failing to reverse a charge associated with double billing through PayPal Credit or failing to process a refund requested by a merchant for returned merchandise.”

PayPal — which has 165 million active accounts worldwide — is currently owned by eBay, but will soon be spun off as its own company.

“From the first encounter a consumer may have had with PayPal Credit, there were problems. Tens of thousands of consumers who were attempting to enroll in a regular PayPal account, or make an online purchase, were signed up for the credit product without realizing it,” said CFPB Director Richard Cordray. “One reason so many consumers ended up having this product, unbeknownst to them, was that PayPal set the default payment method for all purchases to PayPal Credit. Other consumers were simply not able to select another payment method when they tried to pay….Finally, once enrolled, consumers encountered headache after headache. PayPal failed to post payments properly, lost payment checks, and mishandled billing disputes that consumers had with merchants or the company itself.”

What PayPal Says

PayPal didn’t answer questions about the lawsuit and the accompanying proposed consent order, but issued a statement to Credit.com.

“PayPal Credit takes consumer protection very seriously. We continually improve our products and enhance our communications to ensure a superior customer experience. Our focus is on ease of use, clarity and providing high-quality products that are useful to consumers and are in compliance with applicable laws,” the firm said in its statement.

PayPal, founded in 1998, has had a mixed history when dealing with consumer disputes. The service has always been a challenge for financial regulators, as it is not a traditional bank, and standard consumer protections that apply to credit cards don’t apply to PayPal accounts. PayPal was acquired by eBay in 2002. Bill Me Later, which acts a bit more like a credit card and gives consumers the option to make online purchases and pay for them in the future, was acquired by eBay in 2008. It was rebranded as PayPal Credit last year.

Details of the CFPB allegations include:

Deceptively advertised promotional benefits: The CFPB alleges that PayPal failed to honor advertised promotions, such as a $5 or $10 promised credit toward consumer purchases.

Abusively charged consumers deferred interest:The CFPB alleges that PayPal offered consumers limited-time, deferred-interest promotions, and that PayPal purported to let consumers pick how payments would be applied to these promotional balances. But consumers who attempted to contact the company to get more information or request to apply their payments to promotional balances often could not get through to the company’s customer service line or were given inaccurate information. Many such consumers were hit with deferred-interest fees that, due to the company’s conduct, they could not avoid.

Enrolled consumers in PayPal Credit without their knowledge or consent: The CFPB alleges that the company often automatically enrolled consumers in PayPal Credit when those consumers were signing up for a regular PayPal account or making purchases. The company enrolled other consumers while they tried canceling or closing out of the application process. Many consumers ended up enrolled in PayPal Credit without knowing how or why they were enrolled. They discovered their accounts only after finding a credit-report inquiry or receiving welcome emails, billing statements, or debt-collection calls for amounts past due, including late fees and interest.

Made consumers use PayPal Credit for purchases instead of their preferred payment method: The CFPB alleges that the company automatically set or preselected the default payment method for all purchases made through PayPal to PayPal Credit. This meant consumers used PayPal Credit even when they intended to use another method of payment such as a linked credit card or checking account. Other consumers were not able to select another payment method, finding that their purchases were charged to a PayPal Credit account even when they affirmatively selected another payment. Many of these consumers incurred late fees and interest because they did not know they had made purchases through PayPal Credit.

Engaged in illegal billing practices: The CFPB alleges that the company failed to post payments or failed to remove late fees and interest charges from consumers’ bills even when the consumers were unable to make payments because of website failures. Numerous consumers reported that the company lost payment checks or took more than a week to process checks.
Mishandled consumer disputes about payments:The CFPB also alleges that PayPal mishandled consumers’ billing disputes and made billing errors.

In addition to granting refunds, PayPal Credit must improve its consumer disclosures, the CFPB said, to ensure that consumers know they are enrolling or using the product for a purchase.

As we’ve previously reported, a credit line through PayPal Credit can impact your credit scores. If you use the PayPal Credit service, be sure to understand the credit effect it is having. You can get a free credit report summary every month on Credit.com to see where you stand.